Pound / Dollar Higher Amidst Investor Relief, But Strategists Look for Further Losses

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Surging stock markets signify a sharp reversal in risk sentiment for the better, helping the Euro and Pound rally against the U.S. Dollar.

The Pound to Dollar exchange rate recovered back above 1.3130 in the midweek session, having been as low as 1.3081 at the start of the week, allowing Sterling to correct back from what were oversold levels.

The war in Ukraine remains the overarching fundamental driver of global foreign exchange and Sterling has ceded significant value to the Dollar since the war began.

Newswires report on Wednesday Russia's foreign ministry said it would be better if Russia's goals in Ukraine are achieved through talks. 

This adds to reports out earlier this week that were Ukraine to agree to Russia's conditions they would cease fighting immediately.

Amongst some of Russia's demands are that Ukraine recognises the independence of Luhansk and Donetsk while recognising Russia's sovereignty over the Crimea. They also want Ukraine to commit to not joining NATO and other political blocs (i.e. the EU).

"Ukraine president Zelensky no longer insists on NATO membership and said he is open to ‘compromise' on the status of Luhansk and Donetsk," says Kenneth Broux, a strategist with Société Générale.

News of a ceasefire around Kyiv which is set to last through Wednesday might also be a contributing factor to better market sentiment

The market also appears to be leaning heavily on Thursday's meeting of Russia's Sergey Lavrov with Ukrainian negotiators in Turkey as a source of hope that the situation in Ukraine can deescalate.

Ahead of the meeting the AFP newswire reports that Russia says "some progress being made in talks with Ukraine".

Improved sentiment has lead to some selling of the Dollar, which remains a beneficiary during times when investors are fearful.

The rebound being witnessed in Pound-Dollar could also be, at least in part, due to technical recalibrations.

The below chart shows recent price action in the Pound-Dollar rate, with the Relative Strength Index (RSI) in the lower pane:

Above: Daily GBP/USD chart with RSI in lower panel.

• GBP/USD reference rates at publication:
  Spot: 1.3152
• High street bank rates (indicative band): 1.2792-1.2884
• Payment specialist rates (indicative band): 1.3034-1.3086
• Find out about specialist rates and service, here
• Set up an exchange rate alert, here

The RSI is a useful took in that it can signal when a move has become extended: when the RSI dips below 30 - as in the above daily chart - it tells traders an asset is oversold.

Strategists at JP Morgan's trading desk in London say they are looking to buy back into the Dollar but would give Sterling some space to bounce higher in the immediate term.

They observe the Pound-Dollar exchange rate is now flagging as oversold, but buying a bounce is not a high conviction position.

"Given the scant liquidity in the markets right now we may get a chance to buy USD at better levels this week so we temper our enthusiasm for the time being," says the note.

"I would be interesting in fading would be towards 1.3260/70 and 1.3350/60," adds the trader note.

Terence Wu, FX Strategist at OCBC Bank in Singapore says he is turning tactically bearish on Sterling-Dollar from here, targeting a move lower to 1.2901.

"GBP may be caught in the downward trail of the EUR, with the UK facing similar (albeit more diffused) challenges as continental Europe," says Wu.